Commentary: China might not get the economic boost it expects in 2023 from ending zero-COVID

SINGAPORE: China’s rapid pivot away from zero-COVID strategy in December 2022 sets up its reopening as one of the biggest economic events this year. It has come faster and earlier than analysts expected, against the backdrop of mounting economic and social costs associated with maintaining stringent containment measures.

The reopening has raised hopes of a stronger economic boost on the assumption that Chinese consumers will unleash their pent-up demand. Chinese growth is an important source of global demand and central to many regional trade activities.

But will the end of zero-COVID really boost the Chinese economy in 2023?

China’s weak growth last year was largely a result of robust response to the two Omicron waves in the second quarter and fourth quarter of 2022. In late November 2022, Nomura estimated that 25.1 per cent of China’s gross domestic product was negatively affected by zero-COVID controls.

Total consumption and investment only contributed two percentage points to GDP in the first three quarters of 2022, well below the average of 6.7 percentage points before the pandemic, based on annual GDP data from China’s National Bureau of Statistics.

Testing mandates and fears of abrupt mobility restrictions severely suppressed household spending and services activity. Retail sales growth was flat in the first 11 months of 2022. China’s purchasing managers’ index (PMI) indicated deterioration in services business activity in seven of the 12 months in 2022, with the final quarter showing especially weak performance.

REOPENING HELPS, BUT EXPECT TRANSITIONAL PAINS

Ending zero-COVID measures certainly removes a major hurdle to China’s growth. Coface’s 2023 GDP growth forecast of 4 per cent is conservative compared to the likely official target of more than 5 per cent.

Analysts are generally positive as to the reopening’s impact on China’s economic recovery but there is transitional pain to be endured at least for the next couple of months before economic activity moves towards normalcy.

The sharp rise in infections following the relaxation of zero-COVID measures has reduced labour supply. More factory workers, truck drivers, office personnel and service staff become infected while those fearful of contracting COVID-19 also self-imposed isolation, affecting production, logistics and consumption.

There is also a risk of surges as people travel for China’s first Chinese New Year in four years without major restrictions.

United Kingdom-based health data firm Airfinity predicted that the current wave is expected to peak by mid-January, though a second wave driven by the spread to the rural regions is estimated to reach its peak by early March.

Optimistically, Chinese economic activity could return more steadily as early as March, with a firmer recovery possibly starting in the second quarter of 2023.

COVID-19 NOT THE ONLY DRAG ON CONSUMPTION

But there is good reason to be cautious about a strong recovery in 2023, especially for consumption. Zero-COVID restrictions were not the only reasons for weak household spending.

Per capita disposable income growth continued to lag behind pre-pandemic norms, showing only an annual increase of 3.2 per cent in the first nine months of 2022 compared with 5.1 per cent between 2020 and 2021, and 7.5 per cent from 2013 to 2019.

Chinese households are saving at record levels, with the household savings rate hitting 40.3 per cent of GDP in the third quarter of 2022. And it looks like the majority of them do not plan to draw down those savings. A recent survey from the People's Bank of China (PBOC) indicated that the willingness to save remained strong which does not bode well for future consumption.

This strong preference towards savings rather than spending can be seen in the context of falling net wealth, dragged down by housing and financial asset underperformance, and weakening job prospects.

Unemployment is rising, with the jobless rate among youth workers (ages 16 to 24) remaining high at 17.1 per cent.

The global slowdown is expected to constrain hiring intention at export-oriented manufacturing firms, a trend reinforced by the recent deterioration in PMI employment indices, the lowest in nearly three years. The ongoing housing downturn also weighed on job prospects in construction and related sectors.

With household debt level having doubled in a decade, any scope for more leveraged consumption will be limited.

2023 GROWTH RELIES ON DOMESTIC DEMAND

Exports were an important driver for China’s growth during the pandemic, with a record goods trade surplus in 2022. However, external demand for Chinese-made goods is expected to be much weaker in 2023, as other major economies are also forecasting sub-par growth or even recessions.

It will also take time for foreign investment to return. Zero-COVID and weak growth outlook have dampened foreign capital investment plans, particularly those relying on Chinese consumers. Supply chain issues also led some multinationals to consider diversifying their production base away from China.

Without external demand supporting economic activity, domestic growth drivers need to pick up the slack.

Chinese policymakers agreed on this point. After the annual Central Economic Work Conference in December 2022, the meeting readout said that China will focus on boosting domestic demand in 2023 by prioritising consumption recovery, raising personal income and encouraging more private capital to participate in the construction of key national projects.

Beijing also indicated the clampdown on technology companies has eased, saying it will support them in growth and job creation.

But there is a risk that, despite the policy measures and reopening, China still might not see the economic boost it expects. With the global economy expected to see a sharp downturn in 2023, another year of sub-par GDP growth in China will add to the gloom. 

Bernard Aw is Chief Economist for Asia Pacific at Coface.